UK to risk EU court challenge over tougher insurance rules

Pedestrians walk past the 'Gherkin' building in the City of London January 21, 2010.

Reuters/Luke MacGregor

LONDON (Reuters) - Britain intends to implement a tougher version of European Union rules on capital adequacy for its own insurers, even at the risk of a legal challenge in the bloc's courts, a top regulator has said.

Andrew Bailey, chief executive of Britain's Prudential Regulation Authority (PRA), said EU rules known as Solvency II, due to come into effect in 2016 at the earliest, would not be comprehensive enough.

"To mitigate this risk, we plan to use 'early warning indicators' in our supervisory work," Bailey said in a letter to Andrew Tyrie, chairman of parliament's Treasury Committee.

The PRA wants to avoid a repeat of the Equitable Life scandal, which saw the world's oldest life assurer nearly collapse after making promises to policyholders that it could not keep.

It is the latest example of Britain, which is home to the EU's biggest financial centre and had to bail out a number of its banks in the wake of the 2008 financial crisis, losing patience over EU curbs on national supervisors.

Solvency II is a set of European rules requiring insurers to use approved in-house models to calculate their capital buffers.

Bailey said the indicators to be applied to British-based insurers, which he did not detail, would trigger "immediate supervisory action" if they suggested that insurers were using the models to cut back on capital.

Tyrie said this was probably necessary as complex models are all too easily circumvented.

Solvency II is a part of an EU drive for "maximum harmonisation" that leaves little wiggle room for national insurance supervisors to top measures up or water them down.

"We believe we can implement these early warning indicators in the UK within the S-II framework, but in any event we would pursue this approach and accept the risk of EU challenge," Bailey said.

If it imposes add-on rules, Britain could be taken to the European Court of Justice, which has the power to enforce their removal.

Britain has also been fighting for discretion to introduce extra capital requirements on banks beyond EU-agreed levels from 2014; the insurance indicators echo moves by Bailey to counter investor scepticism over how banks use in-house models to determine capital requirements.

Bailey said flexibility was needed in the regulation of insurers because Solvency II did not fully address risks such as troubled sovereign debt.

Solvency II has been a decade in the making and was due to come into effect this year, but has been delayed until at least 2016 because of disagreements over some of the fine detail.

"In particular, it is unclear to us that the French authorities will now be able to agree to any directive that we consider prudentially acceptable," Bailey said. Germany is also looking for a long phase-in of a decade or more, he added.